Johnny Cake Ltd. has 8 million shares of stock outstanding selling at $22 per sh

Question

Johnny Cake Ltd. has 8 million shares of stock outstanding selling at $22 per share an an issue fo $40 million in 10 percent annual coupon bonds with a maturity of 17 years, selling at 94 percent of par. Assume Johnny Cake's weighted-average tax rate is 34 percent, its next dividend is expected to be $3 per share, and all future dividends are expected to grow at 5 percent per year. indefinitely.

What is its WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Given:

Price Per Share

Complete the following analysis. (Do not hard code values in your calculations.

Answer:

Before Tax Cost of Equity =

Before Tax Cost of Debt=

Equity Weight =

Debt Weight =

WACC =

Shares outstanding 8,000,000

Price Per Share

$22.0 Face Value of Outstanding Bond Issue $40,000,000 Coupon Rate on bonds 10% Maturity of bonds 17 Price of Bonds (% of par) 94.0 Weighted Average Tax Rate 34.0% Next Expected Dividend $3.00 Expected Dividend Growth Rate 5.0%

Explanation / Answer

Answer:

Before Tax Cost of Equity = Using the formula Ke = (D1/P )+g

Ke = (3 / 22)+0.05 = 18.64%

Before Tax Cost of Debt= 10%

Equity Weight =22/62 = 35.48%

Debt Weight =40/62 = 64.52%

WACC =(18.64*35.48%)+(10*64.52%) = 13.07%

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